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Spotify: We kick the tyres

Best thing since sliced vinyl?

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A future for Spotify?

Now the big question - I'm afraid it's one that involves a banned buzzword. Is Spotify's business model viable?

Well, my first reaction is obviously no, as a conventional business. There isn't enough money coming into the system. Yet with great technology and enthusiastic users, it's an attractive acquisition play: the way forward is through the EXIT door. With veterans from Skype on board, this is a path successfully taken before: find a rich buyer, and bail.

Ad supported music is a bust: it needs to scale to huge numbers to gain even pitiful revenue. Compare it with radio, which is struggling. Targetting users with ads - which are really sales vouchers - is expensive and unrewarding. And the ads need to be really, really irritating before users even consider paying for a subscription which turns the ads off. But users are promiscuous, and just as they graze from one social networking site to another, they graze between music services. When the ads exceed the pain threshold, they wander somewhere else.

Spotify is probably even worse for the music business, which appears to have given away the house under the misguided belief that it "has to compete with free" by being free, implying we won't pay for stuff. In a couple of days, I knocked dozens of potential purchases off my "CDs to buy" list, and made few discoveries - which translated into just a couple CDs.

So the challenge for both Spotify and music business is to convert us into paying subscribers somehow. What tricks might Spotify have to do this? Well, there are other options.

One is obviously licensing it to ISPs, websites or even Apple itself, as a streaming feature in iTunes. Don't forget that Apple's growth is down to making great music hardware, all content delivery is something that makes the hardware more attractive.

Another option is to make the subscription really attractive. How about downloads? Executives have hinted at adding features to the pay-for version.

The people with the most to worry about from Spotify are the much-hyped web-based services such as CBS' Last.fm and Pandora. Spotify really blows them away. By backing mid-noughties fads ("deliver everything through the web browser", "social recommendation") they backed at least a couple of dead horses.

So Spotify deserves a big round of applause - the first music service launch with a bit of a "Wow! How do they do that?" factor. But it has some way to go to match the deep integration of social options that PlayLouder MSP provides licensees with (chat, stalking, etc), and no downloads. And it will need to sprout more of these and perhaps a new approach to the market before it's viable. ®